A public limited company owns and operates a number of hotels. It wishes to expand its business, increase its turnover and reduce its expenses.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2011). The mark or mark type is shown in brackets.

1. [2] (a) Any two points × 1 mark each:
2. • value (1) of total sales revenue (1)
3. • during a trading period/period of time
4. • net sales (2) sales less returns (2) sales × price (2).
5. Any other relevant point.
6. [3] (b)(i) Any three ways in context × 1 mark each:
7. • advertise more
8. • open more hotels
9. • offer special promotions/loss leaders
10. • lower prices to attract more customers
11. • contact existing customers with offers
12. • offer different ways of selling hotel rooms, e.g. online booking
13. • move into other markets, e.g. conferencing
14. • improve service to customers
15. • increase prices
16. • offering credit to customers
17. • offering more facilities.
18. Any other relevant way.
19. NB sell more = 0 marks.
20. [3] (b)(ii) Any three ways in context × 1 mark each:
21. • buy supplies from cheaper suppliers
22. • bulk buy where possible
23. • install environmentally friendly measures in its hotels, e.g. low energy lights
24. • reduce its labour force
25. • reduce wastage, e.g. of food
26. • introduce more technology, e.g. booking systems
27. • look for sites with low rents for hotels
28. • stop hotel staff using hotel services for their own benefit
29. • use own transport
30. • work more efficiently
31. • reduce wages
32. • control power bills.
33. Any other relevant way.
34. [6] (c) Level 2 (4-6 marks)
35. Candidate has considered both options for providing the finance for expansion and has given a reasoned answer favouring either retained profits or external finance. (If a candidate has only considered one option, award 4 marks max.)
36. Retained profits are profits held back from previous years for use within the company. Using retained profits means that finance is readily available with no repayments and no interest payments. There are no conditions as to its use. External finance, such as bank loans or a share issue, may mean changes to the company. Interest must be paid on a bank loan which must be repaid within a certain time. Issuing shares may mean a dilution of ownership but the money does not have to be repaid. External finance may take some time to set up and, because of this, the company may miss opportunities for expansion.
37. On the other hand, retained profits may be insufficient for the company's requirements. They may be needed for other projects or, if used to expand, other projects would have to be postponed. It may be possible to use some retained profits to start the expansion while arranging external finance to provide larger amounts of capital. It may depend on the profitability of the company, the collateral offered and the economic climate at the time of the expansion.
38. Level 1 (1-3 marks)
39. Candidate has offered statements about retained profits and/or external finance.
40. Retained profits are profits kept back to use later. If they are used no interest is payable. External finance may be shares, debentures or a bank loan. Loans have to be repaid with interest. Shares are not repaid.
41. [2] (d)(i) Any two points × 1 mark:
42. • a legal agreement/licence
43. • between a franchisor and a franchisee
44. • sets out the conditions of the franchise
45. • used as a way of running a business/marketing a business
46. • based on trade name of famous business/example.
47. Any other relevant point.
48. [4] (d)(ii) Any two advantages explained × 2 marks:
49. • enables the business to expand quite quickly because it attracts capital from others rather than raising capital itself
50. • although it shares the profits with the franchisee, a fairly reliable source of profits is guaranteed
51. • the franchisees have committed capital and so will be self-motivated to succeed
52. • the parent company does not run the individual hotels, so management problems, e.g. staffing will be reduced
53. • the risk of failure is shared with the franchisee so spreading risk
54. • the company can build on the business by opening more franchises in other areas
55. • more clients so more profits generated.
56. Any other relevant advantages.